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Roth IRAs Remain Attractive Planning Tools Despite Recent Bills

Oct. 14, 2022, 8:45 AM

The Roth IRA is a popular and often effective tax and retirement savings tool for a wide range of taxpayers. Not only is it an investment vehicle that can be withdrawn from tax-free, subject to certain requirements, but it also can be used as a wealth transfer vehicle for high- and ultra-high-net-worth individuals looking to manage their income and income tax liability both during their retirement years and for their beneficiaries.

Individual income tax brackets and the top marginal tax rate are set to increase after Dec. 31, 2025, with the sunset of the individual provisions of the Tax Cuts and Jobs Act of 2017, recent changes under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and the prospect of additional legislative change on the horizon. This article will focus on recent and proposed legislative changes, as well as the potential impact on current and future account owners and beneficiaries.

Brief Overview

At a high level, a Roth IRA is an individual retirement plan that allows taxpayers to contribute post-tax dollars, subject to income limitations and contribution limitations. For 2022, the ability to contribute to a Roth IRA is phased out at modified adjusted gross incomes of $144,000 for single taxpayers (as well as head of household, married filing separately, and the taxpayer living apart from their spouse at any time during the year) and $214,000 for married filing jointly.

Overall contribution limitations of $6,000 for taxpayers under 50, with an additional $1,000 catch up for taxpayers over 50, also apply. There is a five-year holding period requirement before an account owner can withdraw money tax-free. Also note that these Roth IRA withdrawals are not subject to required minimum distributions after the taxpayer reaches 59 1/2.

Changes Under the SECURE Act

The SECURE Act, enacted in December 2021 as part of the Further Consolidated Appropriations Act, 2020, impacted the way traditional IRAs and Roth IRAs are viewed from both a wealth transfer and tax planning perspective.

Prior to the SECURE Act, beneficiaries of inherited IRAs could benefit from what is often referred to as the “stretch,” a planning strategy providing for the extension of the tax-deferred benefits of an IRA to a non-spouse beneficiary with required minimum distributions (RMDs) generally based on the beneficiary’s life expectancy, as opposed to the life expectancy of the original account owner.

While the legislation was generally taxpayer favorable, and a discussion of all of the changes enacted under the SECURE Act are beyond the scope of this article, under a new SECURE Act provision, the “stretch out” for inherited IRAs was eliminated unless the beneficiary is an “eligible designated beneficiary.” As a result, non-spousal beneficiaries must generally liquidate the IRA within 10 years of the participant’s death.

In addition, under proposed regulations issued Feb. 24, 2022 (REG-105954-20), annual distributions must continue if the account owner was required to take RMDs prior to their death. These significant changes can create unintended tax consequences from a wealth transfer perspective, particularly for taxpayers with retirement assets payable to trusts. Language commonly included in these trusts can cause retirement assets to be paid out to the beneficiaries sooner than intended, subjecting the assets to creditors, divorcing spouses, and more. It is prudent for a taxpayer with retirement assets to have their estate plan reviewed in light of this and other changes under the SECURE Act.

So, what does this mean for Roth accounts? Although Roth IRAs are also subject to the 10-year liquidation period requirement under the SECURE Act, the Roth IRA is not subject to the RMD requirement, allowing beneficiaries to wait until the 10th year to liquidate the account, tax-free. The seismic shift from the “death of the stretch” under the 10-year rule, coupled with the prospect of future higher individual tax rates, may make the Roth IRA a more attractive option to taxpayers, and it is prudent to explore or revisit discussions on Roth conversions in light of these recent changes.

Proposed Legislative Changes

Ongoing discussions of SECURE Act 2.0 legislation, with three proposed bills being discussed in Washington, include several topics that would expand on the original SECURE Act. The proposed legislation would allow employers to contribute a company match to an employee’s Roth account, helping grow employee’s accounts on a tax-free basis.

While removed from the final version of the legislation enacted under the budget reconciliation process on Aug. 16, 2022, preliminary proposals included in the House-approved version of the Build Back Better Act would have significantly curtailed Roth planning in three ways:

  • First, the bill would have prohibited further contributions to Roth IRAs for any tax year where the contributions would cause the total value of the individual’s IRA and defined contribution retirement accounts as of the end of the previous tax year to exceed (or further exceed) $10 million. The limitation would have applied to married filing joint taxpayers with income over $450,000, to heads of household over $425,000, and to single filers and married filing separately over $400,000.
  • Second, if an individual’s combined traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceed $10 million at the end of the tax year, and the individual meets the above thresholds, the bill included a minimum distribution requirement in the following tax year.
  • Third, the bill would have prohibited all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to a Roth IRA regardless of income level.

This proposal effectively would have shut down what is informally known as the step-step Roth. Although these proposals were not enacted, there does appear to be support for placing guardrails on “mega” Roth planning that has been fueled in part by recent widely publicized discussions of the strategy. While the likelihood of these or other proposed changes to Roth IRAs depends heavily on the political makeup of Congress and the White House, it is often the case that the proposed legislation of today has the potential to be incorporated into the legislation of the future.


The Roth IRA can be used in several ways to promote tax-free growth for account owners and future beneficiaries. Even amid current and proposed legislation, the Roth IRA is still often a flexible and effective planning tool for taxpayers in all tax brackets and income levels that can provide powerful planning opportunities for account owners.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andrew Sageser is a senior tax manager at FORVIS. He has more than 10 years of public accounting and tax experience, specializing in a variety of tax and consulting services with a focus on the needs of privately held companies and their owners, as well as high net worth individuals, passthrough entities, gifts, trusts and estates.

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